Modi plan to unlock gold gets new focus with trade gap near record

India has a wide trade deficit, and the government is trying to close it by getting people to give up their gold jewelry.

Prime Minister Narendra Modi and his government have been trying to convince gold-obsessed citizens who collectively own the biggest private holding of bullion in the world to deposit their treasures with banks.

Only 25 tons of the 25,000 World Gold Council estimates is held by households and temples in the south Asian nation.

If you can recycle the existing gold back home, then reliance on gold imports will come down and the current account deficit will be reduced. You can use the gold as an instrument to raise money.

When it comes to efforts to reduce India's import bill, every percentage point counts.

In July, the government tried to discourage the purchase of bullion by raising the import tax on gold to a record high. This can be seen during the current Indian festival season, when demand for gold peaks.

Modi's program allows people to deposit their gold in a bank for a period of one to fifteen years in return for interest payments of up to 2.5% on the value of the metal and a promise to return the equivalent amount of gold. The idea is to boost local supplies and reduce imports.

The State Bank of India has a rate of 5% to 6% on fixed cash deposits for a similar time period.

Modi has to contend with the fact that gold is an emotional purchase in India. Families often give jewelry to their children at weddings and festivals. Depositors can't get their heirlooms back because the jewelry is melted to make sure it's pure before being sold.

The temple has treasures.

There are temples in that area. The revered institutions are managed by trusts and act on behalf of a deity. Devotees give metal to the deities in order to express their gratitude for the birth of a child. The trusts hold about 4,000 tons, which is roughly the same amount as the US Bullion Depository.

The All India Gem & Jewellery Domestic Council's chairman says that temple trusts are critical for the plan.

It will be a relief if some of the gold comes out from the trusts.

The temples are depositing small amounts of gold. James Jose is the managing director of the key Indian gold refinery CGR Metalloys.

It is difficult to convince the trustees of temples to allow the gold deposited to be melted under the scheme.

There is a generational value.

Aditi Das pays a bank to keep her ornaments in lockers instead of depositing them at the same bank and earning interest. The plan didn't appeal to the newly-wed because of the "generational value" of her ornaments

It's not comforting that most of my gold is inherited jewelry and has sentimental value. Even if it is a gold coin or a gold bar, I wouldn't be comfortable giving it up for such a scheme.

The operational aspects on the ground are one of the stumbling blocks. Pethe said that there needs to be flexibility in how long the gold is deposited for and that there should be no questions asked about proof of purchase up to a limit.

Less than 2% of India's annual gold consumption is represented by the deposit plan and a related gold bond scheme.

She said that the gold stock needed to be part of the capital raising mechanism.